Australia, its banks and the property sector: Taking a credit perspective

Against the shifting economic landscape, we take the credit perspective in answering some questions around Australia, its banks and the property sector.

03 Jun 2020

Key takeaways

  • Major credit ratings agencies have divergent views on Australia as a sovereign issuer. Despite the sweeping fiscal measures implemented in response to the COVID-19 crisis, we see the current government retaining fiscal discipline and believe there is a low likelihood of a downgrade to Australian sovereign debt this year;
  • Australian banks’ profitability, asset quality and capital reserves are expected to deteriorate in light of the economic impact of the coronavirus. However, the capital positions of Australian major banks have ranked amongst the highest in the world and we see this as providing sufficient buffer to absorb much of the related near term negative impacts;
  • The outlook for Australian retail REITs remains challenged and we have become less constructive on the Australian office sector; meanwhile the Australian industrial property sector is expected to benefit given the developments around the coronavirus pandemic.

Against the shifting economic landscape brought about by the significant events that have unfolded due to the COVID-19 pandemic, we take the credit perspective in answering some key questions around Australia as a sovereign debt issuer, the Australian banks as well as the Australian property sector.

What is the current outlook of the major credit ratings agencies for Australia as a sovereign debt issuer?

There is a divergence of views and outlooks from the major credit rating agencies. Standard & Poors (S&P) and Fitch have recently moved to a ‘negative outlook’ for Australia as a sovereign debt issuer while Moody’s maintains a ‘stable’ outlook.

Australia was previously on track to return to sustained budget surpluses, but this is no longer the case. S&P’s negative outlook reflects the foreshadowed deterioration in Commonwealth public finances resulting from the large fiscal measures related to COVID-19, which to-date totals around 11% of GDP (as at the time writing).

The focus for S&P is not on the size of the near-term deficits, per se, which they view as being temporary in nature. Rather, it is the willingness of the Australian government to retain fiscal discipline over the medium to longer term that is critical to the ratings outlook.

That is, the Commonwealth needs to demonstrate a clear commitment in preventing the temporary weakness in public finances (due to the stimulus packages) from developing into something that is more structural over time.

Our view is that the current government will retain its fiscal discipline, however the deterioration in labour market conditions over the medium term creates uncertainty around when the extraordinary fiscal measures will eventually be rolled back. That said, we think there is a low likelihood of any rating actions for Australia as a sovereign issuer this year.

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